What are the drawbacks of a K-1?

[Troy P.]

I was reading comments about some crowdfunding site.  Someone said they weren't attracted to a particular investment because it was a K-1 instead of a 1099.  I was a little confused since a K-1 allows you to claim paper losses and would, in my mind, be more beneficial.  There was no explanation and I can't seem to figure out why this would be a less desirable option in your analysis.  Am I missing something?

[Jeff Nash]

I think you are asking about a partnership K-1 and perhaps the situation relates to the difference between a general versus limited partner where the general partner has more potential liability beyond the investment at risk and could be subject to self employment taxes.  There is no way to fully understand the context of the situation though without looking at the prospectus or marketing material and it is really not helpful because each investor or taxpayer has a different tax and financial situation so you can’t view the scenario in isolation.  K-1’s and 1099s are just tax reporting forms.  The implications of each though could matter as previously noted. 

On the other hand, I’ve seen plenty of advertisements for funds that tout “no K-1s” and I assume the selling point there is that you won’t necessarily be delayed in filing your taxes because the K-1s aren’t available until after the original deadline and/or that a K-1 by itself makes tax reporting more challenging.